The Centers for Medicare & Medicaid Services
("CMS") recently issued a final rule implementing
provisions of the Patient Protection and Affordable Care Act of
2010 ("ACA") that pertain to Medicaid reimbursement for
covered outpatient drugs ("CODs") and the Medicaid drug rebate program (the "COD
Rule"). The COD Rule both clarifies and creates a
dramatic shift in Medicaid drug policy, including by:

increasing the rebates that manufacturers of CODs pay to
participate in Medicaid by increasing the minimum rebate
percentages for single-source drugs, innovator multiple source
drugs, and non-innovator multiple source drugs to levels set by the
ACA;

adopting the ACA's revised definition of Average
Manufacturer Price ("AMP"), which substitutes the terms
"retail community pharmacy" and "wholesaler"
for the term "retail pharmacy class of trade" and
identifies specific entities that drug manufactures must include
and exclude when determining AMP;

purporting to clarify drug manufacturers' reporting
responsibilities by aligning the definition of Best Price and with
the definition of AMP; and

updating the Federal Upper Limit or "FUL" formula for
the payment of certain generic drugs to include application of a
higher multiplier to the FUL in situations where the FUL is less
than the average retail community pharmacies' drug acquisition
cost.

Perhaps most strikingly, the COD Rule replaces "estimated
acquisition cost" with "actual acquisition cost" or
"AAC" as the basis by which state Medicaid agencies
should determine their ingredient cost reimbursement to
pharmacies. The definitional change reflects a
"longstanding concern by the [U.S. Department of Health and
Human Services Office of Inspector General ("OIG")] that
states continue to overpay for Medicaid CODs" and memorializes
the recognition of the federal government—including CMS, OIG,
and Congress—that "using a commercially published
reference price as the basis for Medicaid pharmacy reimbursement
has been problematic for both the states and the federal government
because reimbursement based on published compendia prices, as
discussed in several reports issued by the OIG, is often
significantly inflated, and not necessarily reflective of a
pharmacy's actual purchase price for a drug."
Replacing EAC with AAC will, at least in theory, "provide a
more accurate estimate of the prices available in the marketplace,
while assuring sufficient beneficiary access."

In adopting a cost-based approach to pharmacy reimbursement, CMS
simultaneously replaced the regulatory term "dispensing
fee" with the term "professional dispensing fee" in
order to "reinforce [the agency's] position that the
dispensing fee should reflect the pharmacist's professional
services and costs to dispense the drug product to a Medicaid
beneficiary." Indeed, going forward, "when states
are proposing changes to either the ingredient cost reimbursement
or professional dispensing fee reimbursement, they are required to
. . . consider the impacts of both the ingredient cost
reimbursement and the professional dispensing fee reimbursement
when proposing such changes" to ensure that pharmacy
providers' total reimbursement satisfies the "access to
care" requirements prescribed by federal Medicaid law.

The COD Rule "will continue to allow the federal and state
governments the flexibility to provide adequate reimbursement for
the cost of CODs under the Medicaid program," meaning
that AACs and professional dispensing fee amounts likely will vary
(sometimes widely) from one state to another. Judging by the
400-plus public comments generated by the proposed COD Rule, the
forthcoming changes to the Medicaid pharmacy program promise to
generate controversy among policymakers, the provider community,
manufacturers, and Medicaid stakeholders, not to mention
administrative challenges and handwringing by legislators and
Medicaid officials alike.

The COD Rule takes effect on April 1, 2016. State Medicaid
agencies are required to submit State Plan Amendments demonstrating
compliance with the rule by June 30, 2017 to be effective no later
than April 1, 2017.

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